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Analysing Position And Performance – Where To Now For Tesla.

Analysing the Financial position of Tesla

Financial position and the financial performance of the company can be judged only through the financial statements of the company. The financial statements are embedded in the annual report of the company. These financial statements are prepared for the users of the financial statements so that they can have the meaningful and effective decision. In this report, the data of the company – Tesla Inc has been obtained and the analyses have been done accordingly. The company is listed in United States Stock Exchange. At first the name of company and the nature of business of the company along with the background of the company have been detailed. After that through the annual report of the company the financial position of the company has been analysed. For the purpose of the analyses, the annual report of the company for the year ending 31st of December 2017 and 31st of December 2016 has been considered. Two years have been considered for the same company only because of the fact of having more clear and precise comparison with earlier year as base for computation.  Then the financial performance of the company has been analysed as to whether the company is making profits or not and whether the company is generating the higher earnings to their investors. There are three methods for analyses – one is vertical, other one is horizontal and the last one is ratio analysis. In the given report, the ratio analyses have been considered. The analyses have been made with reference to the accounting ratios for profitability as well as liquidity. After the analyses, the appropriate conclusion and the recommendation has been suggested as to whether the investors shall invest in this company or not keeping in consideration all the analyses made from the financial statements.    

For the purpose of conducting the analyses, the financial data of company – Tesla Inc has been taken. Tesla Inc formed in the year of two thousand and thirteen in Delaware, United States of America. Its headquarters are located in Palo Alto, California, United States of America. The company is engaged in the manufacturing of the all types of electric vehicles, storage devices for energy and solar panel. The company has the production facilities and plants for assembly at different locations. Since the year of its operations, the company has been earning profits and good reputation in the market. The company uses the calendar year as the financial year and ends the financial statements by 31st of December of each year. Therefore the form 10K has been considered for obtaining the data and figures.         

Liquidity Ratio

Position is related to the standing as on particular date. In the common parlance if the personnel working in an organization has been promoted from Manager to Director of the company then the position of that personnel earlier was Manager and now he is working ad Director of the company (Anastasia, 2015). The position is identified at the particular point of time. Similarly in case of company the financial position of the company can obtained only at the particular date and point of time. For instance, the company provides the financial statements on 31st of December 2017 then the financial position can be judged only on that day itself.

The position of the company is analysed through the statement of the affairs or the balance sheet of the company as the case may be. Financial position will not only help in assessing the net worth of the company but also helps in the knowing of the fact as to whether the company has enough liquid funds, whether the assets have been correctly valued or not, whether the company is able to achieve its short term liabilities as and when it becomes due and whether the company’s long term liabilities as stated in the balance sheet is at par or it has exceeded the limits and so on (Taylor, 2011).  For making analyses the financial ratios have been calculated and then analyses have been made. Ratio has been calculated under the four major headings. One is profitability ratios, second is Liquidity ratio, third is Leverage Ratio and the last is the efficiency ratio. The ratios have been calculated for two years ending the 31st of December 2017 and 31st of December 2016. It is because the benchmark as 2016 figures has been considered for the purpose of the analyses.  The financial ratios have been calculated and identified and accordingly the analyses have been made.

Liquidity Ratio – Liquidity ratio is one of the best measure through which the manager of the company can judge or assess the ability of the company to repay the short term liabilities including the liabilities towards the expenses. If the company is not maintaining its liquidity ratio at good level there will be chances that the company will go bankrupt or insolvent. Directors of the company are separately more concerned when the company fails to serve the interest and principal obligations when it falls due (Delen, 2013). It is because the liability of the directors of the company will be personal if the deposit of liabilities has not been maintained.     

  • Current Ratio – It is one of the basic ratios which every company considers before finalizing the financial statements of the company. At first the current ratio is the financial ratio which helps in comparing the current assets and current liabilities. It compares as to whether the company will be able to make the payment of the liabilities that is due in the near future and that too shall be paid within the period of one year. In the given case of Tesla Inc, the current ratio for the year 2016 was 1.07 and for the year 2017 it was 0.86. The decrease in current ratio is the tremendous one. It means that the current ratio has fallen down and it has been fallen by 80 cents. There are the chances from the side of the company that there will be inability to pay off the short term liabilities in near future. If the situation still persist then the there is high probability of having the company insolvent. Therefore, the current ratio shall be worked out.   .     
  • Quick Ratio – The quick ratio deals with the ability of the company to generate the cash and its equivalent to pay off the liabilities. The deciding factor of the quick ratio is that higher the quick ratio, higher are the chances for the company to pay off its debts as the company will be able to meet off the liabilities very fast. For calculation of the quick ratio the amount of inventory is reduced from the current assets. In the given case the quick ratio for the year ending 31stof December 2017 is 0.56 and for the year ending 31st of December 2016 as 0.72. There has also seen the decrease in percentage due to which there are the high probability that the company might get itself as insolvent.
  • Working Capital – Working capital is the capital which every company requires to generate and operate the working capital cycle or the operating cycle. Without mentioning the operating cycle and working capital required, no company can perform its function very well.  In simpler words working capital is the safety which is required to be kept so as to meet the expenses in the near future. In the given case, the company has the negative working capital of $1104150 thousands in 2017 and in 2016; the company has positive working capital as $432791. It means that the working capital condition of the company is not good in this year as compared to the earlier year. Due to negative working capital neither any of the financial institutions will provide the finance to the company nor would the company have the enough capital to fund their own leading to the situation of short term insolvent.      

Leverage Ratio / Solvency Ratio

Leverage Ratio / Solvency Ratio – The liquidity is related to the short term obligations and related payments and the solvency ratio is related to future obligations for more than one year and related payments. The leverage ratio helps in understanding what should be the structure of the capital of the company so as to enable the company to obtain the debt financing so as to maximize the return to the shareholders of the company  (Drake, 2010). These ratios are very important for every company in assessing the risk profile of the company. The leverage / solvency ratios are mentioned below:

  • Debt Ratio – It compares the total liabilities to the total assets of the company. It details as to how much assets are there in paying the debt of the company. If the ratio is decreasing then the capital structure of the company shall be regarded as less risky one and in case the ratio is increasing then the capital structure of the company shall be regarded as more risky one. In the given case, debt ratio has been increased from 0.74 in the year 2016 to 0.80 in the year 2017. It means that the company has employed the high risk capital structure which can any time prove as fatal to the organization.    
  • Debt to Equity Ratio – This ratio helps in making the comparison between the total liabilities of the company and the total equity of the company including shareholders funds and reserves and surplus.  In the given case, Debt to equity ratio has been increased from 3.52 in the year 2016 to 5.43 in the year 2017. The higher ratio is the alarming situation for the company as higher the debt to equity ratio higher will be the chances that company is at the risk of insolvency. Therefore, capital structure shall be maintained in such a manner so as to avoid the situation of insolvency.  
  • Equity Ratio – Equity ratio details as to how much assets are related to the equity of the company. Higher the ratio, lesser will be the chances of insolvency and lower the ratio, higher will be the chances of insolvency. In the given case, Equity ratio has been decreased from 0.21 in the year 2016 to 0.15 in the year 2017. Thus, the company has the high risk of insolvency.

Efficiency Ratio – The efficiency ratio informs about the company as to how far the particular assets or finance has been contributing towards the growth of the company. In other words, these ratios helps in establishing the relationship between two items of the balance sheet and then the contribution of one item towards the development of second item has been considered.

  • Asset Turnover Ratio – This ratio helps in establishing the relationship between assets and the turnover. It states that in what ratio the assets contribute towards the increase in revenue. Higher the ratio, higher will be the efficiency of assets in generating revenue and lower the ratio, lower will be the efficiency of assets and hence turnover will be less. In the given case, asset turnover ratio has been decreased from 0.56 in the year 2016 to 0.46 in the year 2017. Therefore, the efficiency level is less.  

Thus, in this manner, the analysis of the financial position of the company has been analyzed and the overall opinion is that the financial position of the company is at high risk.

Extending the previous example, in case the appraisal of the same manager is required to be done then it will be done on the basis of his or her performance over the concerned period. In the same way as the financial position is judged by the balance sheet of the company, the financial performance of the company is judged by the statement of the profit and loss of the company. The balance sheet of the company is prepared at the end of the reporting period at the particular date whereas the statement of the profit and loss has been prepared for the period ending reporting period. It covers the whole period of twelve months from January 2017 to December 2017.  

Financial performance will not help the users of the financial statements in assessing the growth of the company but also help them to compare the same with previous year results so as to know whether the company has made any growth from the past year to the current year or not. The analysis of the financial performance of the company will be measured through the accounting ratios under the heading of profitability  and account observations under heading observations and analysis of values (White, 2015). It wills details as to whether the company is in the profitable situation or loss situation.

Efficiency Ratio

Observations - The profit and loss account of Tesla has shown the increase in revenue from 2016 to 2017 by $ 4758619. On the other hand, the cost of revenues that has been incurred to have high revenue will also increase by $ 4135389. This will lead to increase in Gross Margin which is $ 2222487 in 2017 as compared to $ 1599257 in 2016. The research and development expense which is 12 % of revenue has been increased from $ 543665 in 2017 as compared to 2016. Interest expense for the year ended 31st December, 2017 has been increased by $ 272.4 million. In comparison to this other income which is generated from foreign exchange transaction has shown a decrease of $ 236.7 in 2017. This leads to increase in net loss of $ 2240578 in 2017 as against $ 773046 in 2016.

Analysis of Values in Profit and Loss -  The revenue of the company has been increased due to more automation in sales procedures by the company which is considered as positive step along with increase in no of deliverable in vehicles by the company. The company cost to revenue in comparison to revenue has also enhanced due to increase in volume of sales and also increase in cost of maintenance services provided by the company. As the result, the gross margin has been increased but has only to increased to cover up the variable costs of the company. The margin is not contributing to net margin due to enhance of expenses for research and development and interest expense which in turn helps in development of new  products with enhanced volume but ultimately not fulfilling the goal of stakeholder of profit maximization.

Profitability Ratio: To earn profit is the only motive of all the organization and is very important for the survival of the company. It tells about the efficiency and effectiveness of the operations of the company. The shareholders are interested in profit so as to know the increase in return over the investment made, the creditors will be interested in knowing the ability of the company to make the payment of the interest and the principal and even the managers of the company are interested in knowing the profit as it is directly linked to their incentive and reward plans. Following ratios have been detailed:

  • Net Profit Margin – The net profit margin ratio helps in ascertaining the ability of the company to generate profits from the sales made during the year. In the given case, the net profit margin ratio has been decreased from negative 11.04% to negative 19.05% from the year ending 2016 to 2017 respectively. It exhibits that the company has been generating net loss at the end of the year and it further shows that company is not able to generate the profits from the sales so as to set off the expenditure if any pending in this regard. Thus, the company is working at loss from the last year.
  • Return on Assets – This ratio helps in establishing the relationship by comparing the net profit earned by the company during the year with the total assets of the company. It basically represents the ability of the company to generate profits from the own assets of the company. The deciding factor under this ratio is that higher the return on assets higher will be the contribution of the assets in generating the net profit of the company and lower the return on assets lower will be the contribution of the assets in generating the net profit of the company (Lan, 2012). In the given case, the return on assets has been decreased from negative 3.41% in the year ending 31stof December 2016 to negative 7.82% in the year ending 31st of December 2017.  It exhibits that the company’s assets are not being utilized in the effective and efficient manner through which the return on assets have been decreased.   
  • Return on Equity - This ratio helps in establishing the relationship by comparing the net profit earned by the company during the year with the shareholders equity of the company. It basically represents the ability of the company to generate profits from the funds provided by the shareholders of the company. The deciding factor under this ratio is that higher the return on equity higher will be the contribution of the assets in generating the net profit of the company and lower the return on equity lower will be the contribution of the assets in generating the net profit of the company. In the given case, the return on equity has been decreased from negative 16.26% in the year ending 31stof December 2016 to negative 52.88% in the year ending 31st of December 2017.  It shows that the funds as provided by the shareholders of the company are not being utilized and managed in the proper manner due to which the return on equity has become negative.

Thus, in this manner, the analysis of the financial performance of the company has been analyzed and the overall opinion is that the financial performance of the company is very bad and is not being controlled and managed in the defined manner.

Conclusion And Recommendation

Financial statement forms the part of the annual report of the company. It plays very crucial role from the eyes of the users of the financial statements. It is because of the fact that all the users of the financial statements take their decision on the basis of that only. The report has analyzed in detail the financial position and the financial performance of the company namely Tesla Inc. The ratios showing the financial position has exhibited very clearly that the company is in higher risk in relation to the liquidity as well the solvency. It means the company can become the insolvent at any time. Similarly the negative impact has been seen in the statement of the profit and loss showing the financial performance of the company. In order to conclude the report, the financial position and the financial performance of the company is so bad that neither any investors nor any potential investor will be happy o make an investment in the company.

It is recommended for the management of the company to first properly define the capital structure in accordance with the needs of the company and then take the maximum benefits of assets and funds of the company to generate the high profits.

References

Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 01-05-2018

Delen, D., (2013), “Measuring firm performance using financial ratios: A decision tree approach”, Expert Systems with Applications, 40(10), pp.3970-3983.

Drake, P.P., (2010), “Financial ratio analysis” Handbook of Finance, 52(13), pp 42-44

Lan J, (2012), “16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses”, available on https://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-strengths-and-weaknesses.touch  accessed on 01-05-2018.

Taylor, M., (2011),  “Financial statement analysis”, Accounting Review, 205(15), pp 92-107.

White, G.L., (2015), “Analysis of Financial Statement”.,Accounting Review, 241(24), pp 21-33.

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My Assignment Help (2020) Analyzing Position And Performance – Where To Now For Tesla? Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/finc400-principles-of-financial-management/analysing-position-and-performance-where-to-now-for-tesla.html
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My Assignment Help. 'Analyzing Position And Performance – Where To Now For Tesla? Essay.' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/finc400-principles-of-financial-management/analysing-position-and-performance-where-to-now-for-tesla.html> accessed 21 June 2024.

My Assignment Help. Analyzing Position And Performance – Where To Now For Tesla? Essay. [Internet]. My Assignment Help. 2020 [cited 21 June 2024]. Available from: https://myassignmenthelp.com/free-samples/finc400-principles-of-financial-management/analysing-position-and-performance-where-to-now-for-tesla.html.

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